Prediction of Future Behavior of Cash Flows - Essay Example

In the recent past, earnings usefulness for explaining inventory returns has declined due to the increased cases of manipulation of financial reports. The ability of current earnings to predict future cash flows is fundamentally dependent on the reliability and relevance of accounting figures.

For accounting information to be relevant in the estimation of future cash flows, it must be in accord with the established international accounting principle. Financial analysts argue that accounting transactions that are not supported by the reality in the contextual market are defective and misleading, and their reliability is irrelevant in predicting future cash flows (Gandevani 73). In fact, failure to incorporate both reliability and relevance in decision-making will always lead to unprofitable returns. For instance, unreliable information might lead to overestimation or underestimation of future cash flows, and this may result in poor planning of activities. It is important to recognize that accounting conservatism is pro-relevant at the expense of reliability which means that the relevance of accounting figures and transaction is a vital tool for estimation of future cash flows. In summary, both reliability and relevance must be put into consideration when estimating future cash flows for an enterprise.
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